Nel's New Day

August 10, 2013

Larry Summers, Disastrous for the U.S.

With Ben Bernanke’s term as chair of the Federal Reserve expiring at the end of this year, President Obama has floated the names of two people for replacement: Janet Yellen and Larry Summers. As usual when the people of both genders have been suggested, sexism enters the discussion. CNNMoney is currently the most blatant, surveying 45 female economists about their preference for the position. As of yet, I haven’t heard about a survey of male economists. Others have said that selecting Yellen would be a choice “driven by gender.”

The differences between these people, however, go much farther than gender. Jen Sorensen’s cartoon outlines some of  these differences:

Yellen v Summers Summers comes with very heavy, smelly baggage. He sided with Ken Lay and Enron during the California energy crisis. While Chief Economist of the World Bank, he displayed a dismissive attitude toward climate change and subsequently opposed the Kyoto Protocol. He also opposed the Volcker Rule that would keep banks from speculative investments that hurt their customers; his recommendation regarding the stimulus seriously underestimated the amount of funding needed for this. Summers is a hothead with a record of deregulating institutions, an approach that exacerbated the financial crash before President Obama took over.

During the 1990′s he led the way in overturning Glass-Steagall Act that separated commercial and investment banking. The resulting recession in 2008 was called the Summers Bubble. He has had no regrets in his fight to deregulate the banks and fought against any banking regulations, culminating in his paid position at Citigroup for over a year. He also consulted for venture-capital firm Andreessen Horowitz, asset-management and advisory firm Alliance Partners, and stock-exchange operator Nasdaq OMX Group Inc. His healthy income from speaking includes more than $100,000 earlier this year for a single speech to a conference organized by Drobny Global Advisors.

Summers accepted $135,000 for a one-day visit to Goldman Sachs only a few months before he became Obama’s chief economic advisor, money that one commentator described as “basically an advanced bribe.” While president of Harvard and a member of the board making investment decisions for the endowment fund, Summers consulted for hedge fund D.E. Shaw and then made $5.2 million from the company the year after he left the university.

This one comment from his 1998 testimony before Congress should keep him from chairing the Federal Reserve: “To date there has been no clear evidence of a need for additional regulation of the institutional OTC derivatives market, and we would submit that proponents of such regulation must bear the burden of demonstrating that need.”

Summers opposed Sen. Elizabeth Warren (D-MA) to head the new Consumer Finance Protection Bureau because he supports the corrupt Wall Street perspective, whereas Warren criticized the White House policy on bank regulations. As Matt Viser wrote in the Boston Globe about Warren’s interview in March 2010 on PBS’s The Charlie Rose Show:

“[Warren] said some of Obama’s economic advisers—especially Summers and Geithner—were beholden to Wall Street interests. ‘I think we have different world-views,’ she said…. ‘It will not save us if a handful of Wall Street banks prosper and the rest of America fails,’ she said. ‘Our focus, our energy, our heart has to be on the rest of America.’”

Summers has a long history of disparaging women’s abilities. While president of Harvard, he said that women do not succeed at math and science simply because they lack the “aptitude” in these areas. Luckily most people have paid attention to his sexism rather than noting another probably reason for losing his job at Harvard, his protection of friend Andrei Schleifer.

In 1992 Schleifer became head of a Harvard project directing U.S. government money to help develop the Russian economy through privatization. Tens of millions of dollars in noncompetitive U.S. contracts flowed to Harvard for Shleifer’s Russian work, and his team directed the distribution of hundreds of millions more. Schleifer invested money through his wife in a mutual fund, stopping others from setting up their own funds and violating the project’s conflict of interest policy.

The U.S. government sued, finding that Schleifer and another investor, Schleifer’s friend Jonathan Hay, had tried to circumvent the conflict-of-interest rules. Using false claims, Schleifer engaged in self-dealing, and Hay tried to launder $400,000 through his girlfriend and father. In a civil settlement, Schleifer paid $2 million and Hay between $1 million and $2 million. Harvard paid $26.5 million in addition to the legal fees of between $10 million and $15 million. No one admitted liability.

Before the settlement, Shleifer maintained his friendship with Summers and lobbied for him to become president of Harvard. After Summers achieved this post, he made arrangements to keep Schleifer at the university. “Conflict of interest issues should be left to the lawyers,” Summers told Dean Jeremy Knowles in his pitch for Schleifer. He said he was sensitive to “ethics rules,” but testified that “in Washington I wasn’t ever smart enough to predict them . . . things that seemed very ethical to me were thought of as problematic and things that seemed quite problematic to me were thought of as perfectly fine. . . .”

Summers and Schleifer maintained a close relationship, talking on the phone an average of more than once a day. No one knows which budget was responsible for the approximately $40 million that Harvard was required to pay, but Summers told members of the faculty of arts and sciences that the money did not come from the budget of the faculty of arts and sciences. A spokesman for the university said that the settlement came from “university funds available for these purposes.”

Although Summers seems to recognize the serious issue of economic inequality, his prescriptions for fixing that problem have nothing to do with being the head of the Federal Reserve. Summers believes that the income inequality comes from technology and globalization and has nothing to do with finance—which is the area of the Federal Reserve. As chair, he would have nothing to do with the tax system rewards, equal access to the educational system, or the entrenchment of the social classes.

Yellen has a good track record of economic problems and knows that the most important concern regarding economic stability is employment. Internal Fed transcripts show that Yellen spoke up many times between 2005 and 2007, warning about the looming housing crisis, credit crunch, and eventual recession. That compares with Summers who sneered at claims in 2005 that deregulation and securitization could lead to a full-blown financial crisis.

Yellen, Vice Chairperson of the Federal Reserve, seeks greater transparency for the Federal Reserve. An accomplished economist, she has spent her career in public service, part of the Fed Reserve since 1977. Her focus is on the public good, not the personal good that describes Summers’ goal.

Ezra Klein wrote that Yellen would have to be more qualified than male competitors “to be competitive for the job.” If Yellen is chosen, the reason is that she worked much harder to reach her place at the top, and her choice will be seen as “gendered.” As Jen Sorensen wrote: “It’s symbolic of every time a highly-qualified woman hits the glass ceiling when forced to compete with a loud, arrogant blowhard with a strong sense of self-entitlement and undeserved mystique of greatness.”

The Federal Reserve not only regulates the money supply but also acts as a principal regulator of America’s largest banks. As a lackey of the banks, Summers will allow them to drive the United States into a deep depression, perhaps worse than the one over 80 years ago.  As Rick McGahey wrote, “America needs a Fed leader who will protect small businesses, ordinary investors, and the economy from misbehavior by big banks and financial corporations. We need a fierce regulatory watchdog, not a lapdog of the banks.”

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